The North Carolina Business Court today denied Plaintiff’s request for expedited discovery in the putative shareholder class action seeking to enjoin the Wachovia-Wells Fargo Merger, but agreed to decide Plaintiff’s Motion for a Preliminary Injunction on an expedited basis, setting a hearing three weeks from today. (I wrote about the Motion for Expedited Discovery in a previous post.)

After discussion of the appropriate standard for ruling on a motion for expedited discovery, Judge Diaz focused in his 10 page Order on Plaintiff’s burden on the merits to show that Wachovia’s Board of Directors had breached its fiduciary duties, and the deference to be given the Wachovia Board under North Carolina’s Business Judgment Rule.

The Court described the Business Judgment Rule as a "high hurdle," and one which Plaintiff "may well be unable to overcome . . . particularly where (1) Wachovia’s board asserts that quick action on the Merger Agreement was necessary to avoid a government-directed liquidation of the Company, and (2) Plaintiff presents no evidence of a competing offer for the Company."  Op. at ¶43.

Judge Diaz then observed that the Plaintiff had stated what he described as "colorable claims":

Plaintiff appears to have alleged colorable claims as to his contentions that (1) the Share Exchange transferring a nearly 40% voting bloc to Wells Fargo in advance of a vote on the Merger Agreement is unduly coercive, and (2) the limited “fiduciary out” clause contained in the Merger Agreement violates the Wachovia board’s continuing responsibility to exercise its fiduciary duties. See generally First Union Corp., 2001 NCBC 9 ¶¶ 81, 89 (stating that (1) a relevant test as to shareholder coercion is whether the vote will “‘be a valid and independent exercise of the shareholders’ franchise, without any specific preordained result which precludes them from rationally determining the fate of the proposed merger,’” and (2) courts should invalidate merger plans that “purport to restrict a board’s duty to fully protect the interests of the corporation and its shareholders”).

Op. at ¶44.  Judge Diaz also held that Plaintiff had "present[ed] a colorable claim as to irreparable harm."  Op. at ¶45.

Judge Diaz held, however, that expedited discovery was not necessary because "most (if not all) of the facts pertinent to resolving Plaintiff’s request for preliminary injunctive relief are matters of public record."  Op. at ¶48.  He described those facts as follows:

(1) A mere two weeks before the Company’s demise, Wachovia’s President and CEO was insisting publicly that Wachovia “had a great future as an independent company;”

(2) In the ensuing period, Wachovia’s share price tumbled from $18.75 to $1.84;

(3) Wachovia’s board faced a crisis of historic proportions when it met to consider and approve the Merger Agreement;

(4) Wachovia’s board took very little time to digest and act upon the Merger Agreement;

(5) The Share Exchange gives Well Fargo almost 40% of the vote in advance of a decision by the Company’s shareholders as to approval of the Merger Agreement;

(6) The “fiduciary out” clause in the Merger Agreement prohibits the Wachovia board from walking away from the Wells Fargo deal should a better deal materialize, but instead only allows the board in that instance to make no recommendation to the shareholders, with an explanation;

(7) Should the Merger Agreement be approved by the shareholders, three members of the Wachovia board will be invited to join the Wells Fargo board;

(8) All of the agencies with regulatory authority over the Merger Agreement have approved it; and

(9) Following approval of the Merger Agreement by Wachovia’s board, no other entity has made a bid to purchase the Company.

Op. at ¶49.

The Court gave short shrift to the argument by Plaintiff that the Share Exchange Agreement (which gave Wells Fargo nearly 40% of voting control over Wachovia) was invalid under the Emergency Economic Stabilization Act of 2008.  In a footnote, Judge Diaz picked up the language of the Act which says that an agreement that "directly or indirectly . . . affects, restricts, or limits the ability of any person to offer or acquire . . . all or part of any insured depository institution" is unenforceable against an acquirer.  He held that Wells Fargo, the only acquirer on the horizon for Wachovia, "obviously has no interest in having the Share Exchange declared unenforceable."  Op. at n.7.

The Court set the following schedule for resolution of the Motion for Preliminary Injunction: Plaintiff’s Brief and supporting materials are due November 10th; Defendants’ responsive papers are due November 17th; and Plaintiff’s reply is due November 21st.  A hearing is set for 2:00 p.m on November 24th.  

[If you read footnote 10 of Judge Diaz’s opinion, he mentioned this blog and referred to me as a "prolific North Carolina business law blogger."  I appreciated that.  My dictionary defines "prolific" as "marked by abundant inventiveness."]

There’s been a lot of publicity about North Carolina Senate candidate Kay Hagan’s "lawsuit" against incumbent Senator Elizabeth Dole over a television commercial suggesting  that Hagan is "godless." 

The subject of this post is that there technically isn’t a lawsuit at all, at least not yet.  The court filing by Hagan illustrates an interesting quirk of North Carolina civil procedure.  In North Carolina, you can start a legal proceeding without filing the Complaint which typically begins a lawsuit.

That’s pretty unusual.  I’m not aware of any other state which has a procedure exactly like the one contained in Rule 3 of the North Carolina Rules of Civil Procedure, which lets a lawyer file a Summons to start a lawsuit and to then follow up twenty days later with a Complaint detailing the claims against the defendant. (Though North Dakota Rules of Civil Procedure 3 and 4(c) provide that you can start a lawsuit with a Summons and the Defendant can then demand that the Complaint be filed within twenty days).

The North Carolina procedure is colloquially called a "Summons without Complaint."  Our Rule 3 provides that while a lawsuit is ordinarily started with the filing of a Complaint:

A civil action may also be commenced by the issuance of a summons when

(1) A person makes application to the court stating the nature and purpose of his action and requesting permission to file his complaint within 20 days and

(2) The court makes an order stating the nature and purpose of the action and granting the requested permission.

Why would a lawyer use this procedure?  One reason might be to toll the statute of limitations, which obviously wasn’t necessary given the very recent airing of the commercial, or to try to be first to the courthouse when there is a dispute over where a particular claim should be litigated, also not a particularly significant factor in the dispute between the candidates.

There is a North Carolina form for a lawsuit started without a Complaint, which is exactly what Hagan filed to initiate her claim against Senator Dole. The filing lays out the basis for the lawsuit, probably in more detail than Rule 3 requires, because the Rule requires only "preliminary notice" of the nature of the claim.  See, e.g., Morris v. Dickson, 14 N.C. App. 122, 187 S.E.2d 409 (1972). 

Continue Reading North Carolina Senate Campaign Lawsuit (Hagan v. Dole) Started By Summons Without Complaint

Following the procedure of Moody v. Sears Roebuck and Co., 664 S.E.2d 569 (N.C. App. 2008), and Judge Tennille’s Order in  Moody v. Sears Roebuck and Co., 2008 NCBC 14 (N.C. Super. Ct. Aug. 6, 2008) applying that ruling, the Court approved the withdrawal of class action claims.

The Court permitted the parties to keep confidential the terms of the settlement with the individual Plaintiff.  Judge Diaz recognized that the settlement papers filed with the Court were "public records and, thus, are presumed to be available for public inspection pursuant to the North Carolina Public Records Act," but he reasoned as follows in agreeing to keep them confidential:

In Virmani v. Presbyterian Health Servs. Corp., 350 N.C. 449, 463, 515 S.E.2d 675, 685 (1999), the North Carolina Supreme Court held that  “a trial court may, in the proper circumstances, shield portions of court proceedings and records from the public[.]” 

In the absence of the class action allegations, the parties "could have settled their dispute confidentially and filed a voluntary dismissal without any oversight from this Court." 

The amount being paid, as described by Judge Diaz, was "relatively insubstantial, particularly when viewed in the context of the high-dollar business disputes typical of this Court’s docket."

The case did not implicate substantial public policy concerns.  There had not been an interest voiced by the media or the public in the Plaintiff’s allegations.

Maintaining the confidentiality of the settlement was in the best interests of justice, in the absence of any prejudice to the putative class members or the public at large.

Full Opinion

 

 

Plaintiffs claimed that the Defendant Union had violated the North Carolina Identity Theft Protection Act by its posting of a list of their social security numbers on a company bulletin board.  The Plaintifs also made claims for unfair and deceptive trade practices and for invasion of privacy.

The Act specifically provides that a business may not "Intentionally communicate or otherwise make available to the general public an individual’s social security number."  N.C. Gen. Stat. §75-62(a)(1).  Defendants argued that the list posted on the bulletin board had not been seen by the "general public" and that it had not been posted there in order to facilitate identity theft.  The Defendants also argued that the bulletin board was used for "internal verification or administrative purposes," and that the posting was therefore exempt under N.C. Gen. Stat. §75-62(b)(2).

The Court rejected these defenses, holding that the Act does not require that the general public actually see the social security numbers in order for there to be a violation.  Judge Diaz also held that the communication of the social security numbers does not need to be made either for the purpose of providing them to the general public or for the purpose of facilitating identity theft.  And as to the "bulletin board defense," Judge Diaz held that this presented a question of fact which could not be resolved on a motion to dismiss.

The Motion as to the unfair and deceptive practice claim was also denied, mainly because the Act provides that “[a] violation of [section 75-62 of the North Carolina General Statutes] is a violation of [the UDTPA].” N.C. Gen. Stat. § 75-62(d) (2007).

The Court did grant the Motion to Dismiss on the invasion of privacy claim, however.  It held that the posting of the social security numbers was "not the type of ‘intentional intrusion, "physically or otherwise,"’ necessary to state a claim for invasion of privacy by intrusion into seclusion."  It held that this tort requires  "a physical or sensory intrusion or an unauthorized prying into confidential personal records."

The Court also rejected the argument that the posting on the bulletin board could make out an invasion of privacy claim because it was a "public disclosure of private facts."  The Court relied on  Hall v. Post, 323 N.C. 259, 265–70, 372 S.E.2d 711, 714–17 (1988), in which the North Carolina Supreme Court held that the tort does not encompass claims which involve the publication of true but private facts.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Judge Tennille drew an adverse inference as a result of the Defendant’s claiming of his Fifth Amendment privilege against self incrimination and entered a Preliminary Injunction, holding:

In a civil case, adverse inferences may be drawn against a party who asserts the Fifth Amendment and remains silent.  Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) (“the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them”); see Arminius Schleifmittel GMBH v. Design Indus., Inc., 2007 WL 534573 (M.D.N.C. Feb. 15, 2007) (granting injunction against defendant who asserted Fifth Amendment privilege because by asserting the privilege he rendered plaintiff’s factual presentation unrebutted). Because Bostic has not rebutted Plaintiff’s evidence, Plaintiff has established a likelihood of success on the merits of its claims for misappropriation of trade secrets and breach of his confidentiality agreement.

Order at 3.

Full Opinion

The Business Court held that it had mandatory jurisdiction over a claim involving the interpretation and validity of the corporate bylaws of an electric membership cooperative.  The bylaws were similar to those of a number of other electric membership cooperatives, and the Court held "that the disposition of this case may have an impact far beyond the confines of this case."

Full Opinion

Fisher v. Communications Workers of America, 2008 NCBC 18 (N.C. Super. Ct. Oct. 30, 2008).

The North Carolina Business Court decided today the first published opinion under North Carolina’s Identity Theft Protection Act, N.C. Gen. Stat. §75-60 et seq. The case, Fisher v. Communications Workers of America, also involves an interesting invasion of privacy issue.

The Plaintiffs were members of the CWA, working for AT&T at various locations. A representative of the Union posted a notice on a bulletin board at one job site which contained the social security numbers of all the Plaintiffs.

This led to three claims by the Plaintiffs: that this violated the North Carolina Identity Theft Protection Act, that it was an unfair and deceptive practice, and that it was an invasion of privacy.

The Act specifically provides that a business may not "Intentionally communicate or otherwise make available to the general public an individual’s social security number."  N.C. Gen. Stat. §75-62(a)(1).  Defendants argued that the list posted on the bulletin board had not been seen by the "general public" and that it had not been posted there in order to facilitate identity theft.  The Defendants also argued that the bulletin board was used for "internal verification or administrative purposes," and that the posting was therefore exempt under N.C. Gen. Stat. §75-62(b)(2).

Judge Diaz rejected these defenses.  He held that the Act does not require that the general public actually see the social security numbers in order for there to be a violation.  He also held that the communication of the social security numbers does not need to be made either for the purpose of providing them to the general public or for the purpose of facilitating identity theft.  And as to the "bulletin board defense," Judge Diaz held that this presented a question of fact which could not be resolved on a motion to dismiss.

The Motion as to the unfair and deceptive practice claim was also denied, mainly because the Act provides that “[a] violation of [section 75-62 of the North Carolina General Statutes] is a violation of [the UDTPA].” N.C. Gen. Stat. § 75-62(d) (2007).

The Court did grant the Motion to Dismiss on the invasion of privacy claim, however.  It held that the posting of the social security numbers was "not the type of ‘intentional intrusion, "physically or otherwise,"’ necessary to state a claim for invasion of privacy by intrusion into seclusion."  It held that this tort requires  "a physical or sensory intrusion or an unauthorized prying into confidential personal records."

The Court also rejected the argument that the posting on the bulletin board could make out an invasion of privacy claim because it was a "public disclosure of private facts."  The Court relied on  Hall v. Post, 323 N.C. 259, 265–70, 372 S.E.2d 711, 714–17 (1988), in which the North Carolina Supreme Court held that the tort does not encompass claims which involve the publication of true but private facts.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

 

The Defendant’s exercise of his Fifth Amendment right against self incrimination was the basis for the North Carolina Business Court’s entry of a Preliminary Injunction on October 29th in Amacell LLC v. Bostic.

Plaintiff asserted that its former employee, a senior research scientist, had misappropriated trade secrets and violated a confidentiality agreement.  The Defendant didn’t deny the misconduct alleged, but instead invoked his Fifth Amendment right against self-incrimination.

Judge Tennille drew an adverse inference as a result of the Defendant’s refusal to testify and entered the Preliminary Injunction, holding:

In a civil case, adverse inferences may be drawn against a party who asserts the Fifth Amendment and remains silent.  Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) (“the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them”); see Arminius Schleifmittel GMBH v. Design Indus., Inc., 2007 WL 534573 (M.D.N.C. Feb. 15, 2007) (granting injunction against defendant who asserted Fifth Amendment privilege because by asserting the privilege he rendered plaintiff’s factual presentation unrebutted). Because Bostic has not rebutted Plaintiff’s evidence, Plaintiff has established a likelihood of success on the merits of its claims for misappropriation of trade secrets and breach of his confidentiality agreement.

Order at 3.

The Business Court also dealt with the Fifth Amendment in the context of civil litigation in its opinion in Sports Quest, Inc. v. Dale Earnhardt, Inc., 2004 NCBC 3 (N.C. Super. Ct. Feb. 12, 2004), where the Court held that a plaintiff who refused to testify about certain matters could not testify about them at trial, and that it would give an adverse inference instruction.

 

The Plaintiff in the would be class action seeking to enjoin the Wachovia and Wells Fargo merger is pursuing his effort to obtain expedited discovery.  The parties have staked out the broad outlines of the claims and defenses in their briefs on that Motion. Plaintiff’s Brief is here, Wachovia’s Brief, filed yesterday afternoon, is here.

The essence of Plaintiff’s argument is that the $7 per share offered by Wells Fargo in the Merger Agreement is an inadequate price, and that the Wachovia Board of Directors violated its fiduciary duty by approving the merger and by entering into the Share Exchange Agreement that gave Wells Fargo nearly 40% of the outstanding voting stock of Wachovia.

The Claim Of Inadequate Price

On the claim that the price being paid by Wells Fargo is inadequate, Plaintiff argues that Wachovia stock was trading at $10 per share on September 26, 2008, before the bailout bill was passed, and that the effect of the bailout is to make Wachovia more valuable because the federal government will purchase its non-performing assets. 

As Wachovia points out (in its Brief at page 4 n.2), there is no certainty that it would be entitled to federal funds, which are to be allocated in the discretion of the Treasury. 

Wachovia says, based on the previously presented Affidavit testimony of Robert Steel, that the "stark choice" for Wachovia was either to accept the Wells Fargo offer or to enter receivership. (Wach. Brf. at 4)

Fiduciary Duty Claim

Plaintiff’s claim of violation of fiduciary duty is based on the argument that the Share Exchange Agreement has rendered the shareholder vote on the merger "essentially meaningless," and precludes any competing bid from being made. 

Plaintiff contends that the Share Exchange is invalid under the Emergency Economic Stabilization Act of 2008.  He points to the Section 126(c) of the Act, which reads:

UNENFORCEABILITY OF CERTAIN AGREEMENTS.

No provision contained in any existing or future standstill, confidentiality, or other agreement that, directly or indirectly

(A) affects, restricts, or limits the ability of any person to offer to acquire or acquire,

(B) prohibits any person from offering to acquire or acquiring, or

(C) prohibits any person from using any previously disclosed information in connection with any such offer to acquire or acquisition of,

all or part of any insured depository institution, including any liabilities, assets, or interest therein, in connection with any transaction in which the [FDIC] exercises its authority under section 11 or 13, shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.

Wachovia launched a full frontal attack in response to the assertion that there is another potential buyer or merger partner:

Plaintiff’s application to this Court is based on the unsubstantiated and illogical notion that Wachovia has alternatives to the Wells Fargo merger and that somehow shareholders are being prevented from taking advantage of these supposedly superior opportunities.  This makes no sense.  It is now more than a month since Wachovia first announced that it was available for a transaction, and no offers other than those by Citigroup and Wells Fargo have been made.  If any capable third party was interested in making such an offer, it could have done so. 

Wach. Brf. at 5.  Wachovia also says that "any bank large enough to consider acquiring Wachovia knows how to formulate and communicate such an offer." (Wach. Brf. at 10-11).

The parties are also at odds over the significance of the "fiduciary out" in Section 6.3 of the Merger Agreement.  Plaintiff says that the fiduciary out does not permit Wachovia to terminate the Agreement in the event of a superior offer, but instead requires it to present the merger to the shareholders for a vote without a recommendation. 

On the point of motive, Plaintiff contends that the motive for this alleged breach of duty was to obtain "lucrative ‘golden parachutes’" for Wachovia’s executive team and for them to retain employment with the merged bank. Wachovia responded that the only management employee who voted to approve the merger is Robert Steel, who has publicly stated that he will not take a position with the merged entity.

Wachovia’s Other Arguments

Wachovia stresses the need to close its transaction, and says that the consummation of the merger is "crucial to the stability of the United States banking system" in the judgment of the Federal Reserve.  Wach. Brf. at 2. 

The Charlotte bank says that Plaintiff can have no hope of posting a bond even it it obtains injunctive relief.  As Wachovia puts it:

it is inconceivable that this shareholder could possibly post a bond for the potential costs and damages resulting from obtaining a wrongful injunction against a multi-billion merger that is critical to the stability of the financial system

Wach. Brf. at 3. That would be quite a bond.

The parties failed to submit their designation of mediator to the Court by the deadline provided for in the Case Management Order, and also after an inquiry from the Court.  The Court held that the parties had as a result "forfeited their right" to select a mediator. 

The parties were also delinquent in filing their good faith estimate of costs.  The Court ordered that document to be filed by a set date, and held that if the parties did not complete that filing that they would be required to show cause why they should not be held in contempt.

Full Opinion